ETF Edge - Crypto ETF Craze: Behind the Spate of Filings 6/26/23

Episode Date: June 26, 2023

CNBC’s Bob Pisani spoke with Jeremy Schwartz, Global CIO of WisdomTree, and Nate Geraci, President of the ETF Store.They discussed the recent spate of new filings for spot bitcoin ETFs, including the big behemoth BlackRock itself submitting an application just two weeks ago. Do they know something the rest of Wall Street doesn’t? They also talked broader market trends, including outflows from gold ETFs and long-awaited momentum in equity ETFs, which have had to play catch up to bonds all year.In the “Markets 102” portion, Bob continued the conversation with Nate Geraci from The ETF Store. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQQ, supporting the innovators changing the world. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange-traded funds, you're in the right place. Every week, we're bringing you interviews, market analysis, and breaking down what it all means for investors. I'm your host, Bob Pisani. Today on the show, we'll discuss the crypto craze. We've seen a spate of new filings for spot Bitcoin ETFs lately, including the big BlackRock.

application submitted just two weeks ago. Why now? We're also called broader market trends, including outflows from gold ETS and long-away to momentum and equity ETS, which have debt to play out so far this year. Here's my conversation with Jeremy Schwartz, Global CIO of Wisdom Tree and Nate Dracey. He's the president of the ETF store. Jeremy, I was at a conference a few weeks ago where Gary Gensler spoke. He was actively hostile to crypto, saying it was rife with hucksters and fraudsters and scam artists. Why, explain to us, why does Wisdom Tree and BlackRock believe

that you guys might change Gensource thinking about this? Well, you know, we are, well, thanks for having me, Bob. Appreciate being here and Nate, glad to be on with you. You know, I think the thing we're trying to do, we see, you know, we've been able to successfully launch products in Europe. We've been in the market for a number of years with spot products in Europe.

So the European regulators had been more friendly And they've been able to get comfortable with the mechanisms, the custodians, how the markets work. And so you go to the rejection letters, and we've faced that rejection in the past. And you say, well, can you address some of the issues the SEC points out? And one of those key issues, they've called market manipulation one of their concerns. And you say, well, why do they think there's market manipulation? If they've allowed a Bitcoin Futures ETF that is basically based off the same prices. But one of the key differences is the futures market has a regulated exchange that shares data

and has monitoring surveillance of the data that goes behind the futures. And so I think some of the new filings have these data sharing agreements, surveillance sharing, new ways of doing it. Now the question is, will that address the SEC's concern on market manipulation? But that is one of the things I think we're all trying to address. So you think you've made some tweaks. What additional tweets to the application process have you made that really differentiate these from other applications that have been rejected? That's what I'm trying to get to right here. I'm still not quite sure what you're saying that's different that's going to make them say, oh, you've been right.

Well, I think everybody's going to have to go to the fine print, and it's hard for me to comment too much about all the details while you're in these periods. But I think the key is, will the exchanges share data and, you know, and had more comfort than what was previously done before? And I think the data sharing agreements are the key element to that. Yeah. So the basic, Gensler's basic reason for rejecting Bitcoin ETFs is the space is unregulated and it's got, it's rife with potential for fraud. He said that, again, two weeks ago. Is there some way you're getting to the heart of those concerns? I'm trying to get, how would you get him to say, yes?

Yes. Well, yeah, if he's worried, now, you know, I don't think he would say Bitcoin is a fraud. You know, what he's, now the question is, are there activities in the pricing that the SEC would be concerned about? Is there, quote unquote, market manipulation that they can't monitor. Well, if they have these data share agreements that they can monitor the pricing in a way that they monitor prices on traditional regulated exchanges, maybe that is the leap that gets them more comfortable. But we shall see. Yeah. And Nate, I want to bring you in here. old ETF watcher. You're in this business. What's your take on this? Do these filings, the recent filings from Black Rock and Wisdom Tree indicate something's going on here that they know something we don't know? Why now? I still can't figure out what the differentiator is here. Well, I think it's a good point. First of all, the timing of Black Rock's filing, I think, was certainly surprising

given the current regulatory backdrop in crypto. The SEC has been extremely aggressive. over the past year with essentially a regulation by enforcement approach. And there's been absolutely nothing to indicate the SEC is ready to approve a spot Bitcoin ETF. So clearly BlackRock filing for an ETF is noteworthy. It's going to attract attention because we're talking about the world's largest asset manager. This is a firm who's obviously very well connected to government officials and regulators. And so from my perspective, it's hard to imagine BlackRock filing for a spot Bitcoin ETF on a whim without thinking they had a real shot at approval. So the question then is, well, what changed? And unlike Jeremy, I can get into the fine print just a little bit. And I think

what might be the game changer here was the language of NASDAQ's 19B4 filing on this I shares ETF, which stated that NASDAQ is expecting to enter into a surveillance sharing agreement with a United States spot Bitcoin exchange. That could be the game changer. Because if you think about this, the SEC and Chairman Gary Gensler have been crystal clear that they're not allowing a spot Bitcoin ETF until they have regulatory oversight of crypto exchanges, right? They've repeatedly pointed to concerns over fraud and manipulation in the underlying spot Bitcoin market is a primary reason for rejecting Bitcoin ETF applications. Well, one way to potentially overcome those concerns is for the Bitcoin ETF's listing exchange to enter into a

surveillance sharing agreement with a spot crypto market that the SEC deems, is of significant size. So if you look at the I-Share's Bitcoin ETF proposal, let's say NASDAQ is able to enter into an agreement with an exchange such as Coinbase. Theoretically, that could clear a pathway towards approval since it would directly address the SEC's main concern. Jeremy, do you have a similar understanding here,

surveillance sharing agreement of some kind? That's exactly what I'm talking about. And so I think needs spot on there. And that is, I think, hopefully, the kind of advancements we want to see. We have our own versions of that. And so I think that's, we got to see, will this be the extra hurdle? I mean, there could be other fears from the SEC on Coinbase itself. Obviously, there's the ongoing litigation there.

But, you know, we work with Coinbase on our products in Europe. We're working with them on, you know, this new app that we're building, Wisdom Street Prime, our custodian. And so, yeah, yeah, we are, you know, we do believe there's there's good progress there. Yeah. And Jeremy, what about, well, Nate, actually, I want to ask you, what about this argument that keeps being made that they've approved a Bitcoin futures ETF, therefore they must approve a spot Bitcoin. But it seems to me there's a difference.

And if futures are a zero-some game, you've got long and short positions that you can monitor, but with a spot Bitcoin, it's just on the blockchain. And there is no monitoring. It seems to me that's an essential difference. Maybe I'm wrong, but... Really, this is the thrust of Gray Scales lawsuit. And what it boils down to is we do have CME traded Bitcoin futures that are trading. It's a regulated market by the CFTC.

But those Bitcoin futures are taking their pricing cues from the exact same exchanges that a spot Bitcoin ETF would. And so that raises a question. If those pricing cues are good enough for Bitcoin futures, why would they not be good enough offer a spot Bitcoin ETF. The other thing that I think I have to mention here is it looks like tomorrow we're going to have a two-times leverage Bitcoin Futures ETF launch. This is by volatility shares, ticker BITX. To me, it's absurd that we're going to offer investors a two-time leverage Bitcoin Futures

product before we have a very straightforward spot Bitcoin ETF. But again, this gets back. This is the thrust of the gray scale lawsuit. Yeah. And the other thrust is essentially Bitcoin ETFs already exist. They're just not in the U.S. There's several in Canada. We have the purpose Bitcoin ETF.

That's been around for a while. I talked to the owner there, the CEO there a couple of years ago. They seem to trade with not many issues, but they're not addressing the unregulated nature of Bitcoin, essentially. And I mentioned there's also Bitcoin futures. But none of this has swayed the SEC. So the two-time leverage one is going to start trading tomorrow. I'm just not sure the sole adds up to a reason for them to actually say yes. There is a difference between the futures and the spot because you can monitor the open positions,

right? The long and short positions. You can't really do that with the spot of Bitcoin, right? I mean, that seems to be the essential difference. But to me, that gets back into the surveillance sharing agreement in that if we have a publicly traded company like Coinbase, who is willing to share their underlying trading data with an exchange like NASDAQ, that offers the SEC the ability to surveil here. Will that be enough? We'll see. But I would also say that BlackRock's not just in the business of filing ETFs on a whim. And I think there's some headline risk here for BlackRock going out on a limb attempting to file for a

spot Bitcoin ETF if they really felt like they had no path to approval. The other wild card that I'll mention here is last week there was a new crypto exchange that launched. It's called EDX markets. This is backed by a consortium of companies including Citadel, Fidelity, Charles Schwab, and this exchange is intending to be a fully compliant, regulated venue in the same vein as the New York Stock Exchange or NASDAQ. And I only point that out because if that can get enough volume, perhaps that could be the regulated market of significant size in the eyes of the SEC and get them comfortable with approving a spot Bitcoin ETF. Yeah. You mentioned great. So Grayscale's been locked in a legal battle with the SEC about converting the Grayscale Bitcoin

Trust into an ETF. That's what they want. They're suing the SEC. A decision is expected, I don't know, maybe later this year. And Grayscale's already made it pretty clear. They're going to convert the GBTC into an ETF as soon as it can. So Nate and Jeremy weigh in here. What are the chances Grayscale will prevail? Yeah, my expectation, I think there's a better chance than not that gray scale is going to prevail in that lawsuit. If you look at the arguments, there were oral arguments made several months ago. I thought gray scale was very compelling. And again, it gets back to treating like situations alike. And if you look at Bitcoin futures, they're taking their pricing cues from the exact same place that a spot Bitcoin ETF would take its pricing cues.

What's interesting is I've been watching the discount on the Grayscale Bitcoin Trust, ticker GBT, that shrunk to nearly 30% here recently. It was as much as about 50% at one point. That could be an indicator that the market thinks there's a growing chance, you know, A, that gray scale prevails, but B, that there could be a spot Bitcoin ETF approval, because that would mean there's a better chance for GVTC to convert, and that discount would get arbitraged away. Yeah. Jeremy, you want to weigh in here on gray scale or anything like that? You know, I would not want to speculate on lawsuits that are not outside our purview. But we are definitely working hard on our own, on other things.

And like we said, our European products worked very, very well. So we think the ETF structure would be a benefit to U.S. investors, that we think the structure would add transparency that the SEC wants. So we do think it would be great to have a spot Bitcoin ETF. Yeah. And you're not standing still here at Wisdom Tree, Jeremy. I mean, you're working on a Prime app. I know it's a personal finance app I gather that would allow people to buy and sell funds, Bitcoin, Ether, and Gold.

Tell us about that. You know, this is something we're very excited about. Over the coming weeks, it's going to be rolled out. So at Wisdomtreeprime.com, there's a waitlist. You'll be able to see it'll be available to certain states before others because we need to money, transmit our licenses in all the different states, but we're slowly getting those on. And it'll be exciting. I mean, beyond Bitcoin and Eath, which will be available in the initial rollout,

we'll have a cross-section of treasury funds from tips to short-term treasuries, long-term treasuries, well, things like large-cap stocks, technology stocks. But the key is, whereas your banking account, you know, your checking account, they're not paying appropriate interest rates in the U.S., where you get 5% in short-term treasuries that you can ideally spend off of. And so there will be new features added throughout the year where you could have spend, attached to something like treasuries. I mean, this is the benefits of the blockchain that we're very excited on

through the new building finance, the future finance, these new rails through the blockchain. You know, the consumer won't even know it's based on the blockchain, but the underlying infrastructure will add all sorts of capabilities. We think it's a great best-in-class type structure, adding new characteristics, but merging spending with savings on top of treasuries. I'm very excited to be disrupting what I traditionally use for my own checky account. I mean, I'm excited to be able to use this for that type of feature going forward.

So do you think, I guess the question is, where do we go from here? Your application is in, how long do you think it will take to get a response from the SEC, Jeremy? I've known not to speculate on this topic. You know, as much as we know, I really can't say I have any clarity on what it's going to take and how quickly we will. Understood. Nate, what about you? How long do you think it'll take to get a response?

I'm not going to speculate on that, but here's what I will say. It's my belief that the SEC should approve all of these at the same time. And when they get comfortable with it and let investors decide who the winners are, I think it's important to recognize that firm such as Wisdom Tree and Bitwise and Grayscale, they have been pursuing this product for years. They put a lot of blood, sweat, and tears into this. And it would seem a bit unfair to me if Aishers gets first to market. Absolutely. So how many of them are out there? 30 or so? I don't know. There's still some out in front of them, but it would be a little awkward if suddenly, if they actually convince them, Wisdom Tree or BlackRock, and suddenly said, okay, Black Rock can go ahead and they didn't approve the other one. It would be a little

awkward, wouldn't it? Or maybe they can say, well, this is a different structure. Maybe what you were talking about, the surveillance mechanism would make the difference, and they'd have to go back and cure the defects in the prior applications. Yeah, if the argument is that Black Rock figured out how to get a surveillance sharing agreement in place with an exchange such as Coinbase. I get that. But I also think the SEC needs to be aware of the poor overall optics if they were to approve the I shares Bitcoin ETF ahead of others. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the Markets 102 portion of the podcast. We'll continue the conversation with Nate Geraci from the ETF store.

Nate, thanks very much for staying with us. I wanted to chat with you. and didn't have a chance in the show, let's talk a little bit about gold. Physical gold ETF flows seem like a real story this year. You and I have chatted about this. We've seen $2.3 billion in inflows this year, but there's been outflows from gold in the last month. And this is occurring at the same time we're seeing inflows into equity ETFs. Is there some kind of relationship going on here?

I'm just curious about why we're suddenly seeing gold outflows when there's been gold inflows all year. I do think there's a relationship here. And to your point, there's been over two billion of inflows into physical gold ETFs. But if you look, over a billion has come out just in the past month or so. And I find that interesting because if you think the Fed is ultimately going to pivot and bring rates back in, theoretically, gold could be a decent place to be, especially if inflation remains somewhat elevated. But, you know, you look over on the equity side, up until about,

a month ago, equity ETF inflows had been muted. They recently just overtook fixed income ETF. So year to date, I show about nearly 200 billion has gone into ETFs overall, about 100 billion on the U.S. or on the equity side. But, you know, if you look about over the past 30 days or so, about 40 billion has gone into U.S. equity ETFs after not much being put to work there through the first five months of the year. And so I think what we're seeing to what you were alluding to is investors start to chase returns here a bit because the S&P 500 is a photo thing, right? I mean, isn't that what's going on? Yeah, I mean, you're missing out. 14% NASDAQ's up 35%. I think investors were very skittish earlier in the year. They weren't believing

in the rally. And now I think the returns are such that it's forcing investors hands a bit. And so you're seeing that money rotate out of a, you know, quote unquote, safe haven like gold and into equities. Still, it's been kind of sluggish this year. We are used to seeing, what, $700, $800 billion in inflows into ETFs year after year after year. And what are we at $130 billion or something like that so far? I guess this is somewhat understandable when you have a down year for bonds and a down year for stocks like we had last year. Is it as simple as that to explain why the flows have been on the light side? I do. And I think you had other factors at play here. If we go back to earlier in the year,

we still have the Fed raising rates. We had the quote unquote regional banking crisis. We still have a major conflict going on with Russia and Ukraine. There are a lot of factors out there that I think are making investors feel just a bit wary about putting money to work. But I think here more recently, there's some optimism that the Fed may actually be able to pull off a soft landing, that inflation is slowly coming back down, the overall economic backdrop.

it looks okay at this point. And so I think the thinking is maybe the Fed can actually pull this off. I have been astonished that this may in fact be the case because wouldn't it be something if that actually happened? All of us who've been around, and you've been around a long time, Nate, like me, are sort of conditioned to understand historically that if the Fed suddenly raises interest rates to combat whatever, an overheated economy or inflation, it usually induces a recession. There's very strong muscle memory in the market history around this. And yet, we keep waiting for it. Wouldn't it be something if, for whatever reason, the weirdness of the whole situation around the COVID or anything else, wouldn't it be something if we actually didn't get a recession this time?

It would. And I think this is exactly why we've seen flows behave in such an odd manner this year. Again, to your point, if you look at the historical data when the Fed's raising rates like this, typically it does result in a recession. And I think investors were sitting there earlier in the air, and they didn't want to stand in front of that. Now, I will say the one counter to that is if you look at forward price to earnings ratios, you look at the S&P 500, for example, it's nearly 19 right now, which is not exactly cheap on a historical basis. That means that earnings are going to need to do the heavy lifting moving forward. So we'll see if we'll not.

Well, not only is it not a recessionary multiple 19. That's an expansionary multiple. You know, people don't understand that. The market's not pricing in recession. Now, the tech bulls point out that this is largely because of the expectations around AI, which is propping up all of those big 10, you know, big cap tech ETFs. And maybe they're right. But nonetheless, overall, even in other sectors besides tech, even in cyclical sectors,

There's not dramatic cutting in the earnings expectations for this year. I find that quite remarkable. And so far, the analysts have been right. Everybody's been waiting for them to slash earnings estimates, and it hasn't happened to any appreciable extent. Yeah, there's a lot going on in the market right now that I think is confusing investors. There's a lot of mixed signals. I was looking at ETF inflows this morning.

Number two, in terms of inflows this year, is the I shares 20-plus-year Treasury bond. ATF, tick or TLT. Now, that's had nearly 12 billion in inflows. I think that speaks to some cautiousness out there. Exactly. All right. Nate, we've got to go, but thank you very much for joining us. Nate Terracie, everybody, is the president of the ETF store. And thank you for listening to the ETF Edge podcast. Investco QQ believes new innovations create new opportunities. Become an agent of innovation. Invesco QQQQ, Invesco Distributors, Inc.